Taking the Good with the Bad

Louis Navellier, chairman and CEO of Navellier & Associates, thinks investors may be overreacting to fears about the subprime mortgage market and overlooking some of the positive things going on in the economy.

The subprime mortgage crisis is having a big impact on Wall Street. A couple of weeks ago, the Mortgage Bankers Association said that more homeowners were unable to keep up with their mortgage payments. The rate of homes entering the foreclosure process hit a record 0.54% in the fourth quarter, and the delinquency rate on home loans rose to 4.95%, up from 4.67% three months earlier.

Rising problems with subprime mortgages, made to borrowers with the riskiest credit, has roiled New Century, Countrywide Financial, HSBC and other financial companies with heavy subprime exposure. Just for comparison, the default rates for prime adjustable-rate mortgages rose to a seasonally adjusted 3.39%, up from 3.06% in the past three months, while sub-prime ARMs increased to 14.44% up from 13.22%.

The states with the highest delinquency rates are Mississippi, Louisiana and Michigan. The states with the higher foreclosure inventory rates are Ohio, Indiana and Michigan. However, the subprime market's big bet was out West. According to the National Mortgage News, seven of the top ten subprime mortgage originators were based in California. If housing falters in California as it has in key Southern and Midwestern states, then the subprime mess will get much worse.

Wall Street isn't taking any chances-it has been selling first and evaluating second. This has resulted in punishing value stocks, especially financials. Although Wall Street has had a value bias for seven straight years, growth stocks now appear to be one of the winners emerging from the subprime crisis.

Meanwhile, a couple of weeks ago, the Organization of Petroleum Exporting Countries (OPEC) decided to keep output unchanged, despite calls for more oil by the world's biggest consuming countries. Currently OPEC pumps about 30 million barrels a day and accounts for more than a third of the world's total consumption.

Interestingly, some OPEC delegates must be stock market investors since they voiced concern over the stability of world markets after the volatility in recent weeks. A [monthly] OPEC report also noted that stock markets around the world have been volatile and may be signaling a global economic slowdown.

Ready for some good news? February industrial production rose 1.0%, well above economists' consensus expectation of a 0.3% rise. Capacity utilization at US factories rose to 82.0% from 81.4%, which was also well above expectations of 81.3%. For now, it appears that the beleaguered manufacturing sector is hanging in there and is trying to pick up a bit. It's very possible that the weak US dollar is boosting the exports of manufactured goods, so it will be interesting to see if manufacturing can build on its recent momentum.